UNCLAS REYKJAVIK 000203

USDOC FOR LEAH MARKOWITZ
TREASURY FOR LAWRENCE NORTON
STOCKHOLM FOR FCS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN IC
SUBJECT: ICELANDIC KRONA DROPS TO NEW LOW, INCREASING CALLS TO
ADOPT EURO

REFS: A) REYKJAVIK 85, B) REYKJAVIK 66, C) REYKJAVIK 55


1. (U) As a result of the international financial crisis and lack of
liquidity in the credit markets, the Icelandic krona (ISK) has taken
a beating, falling almost 50 percent since the start of the year.
On September 17 the ISK trade weighted index, which measures the
price in ISK of a weighted average of the currencies of Iceland's
biggest trade partners, hit a record high. There is consensus among
most Icelandic experts that the ISK has hit close to bottom, but
none predict when it will start strengthening.


2. (U) Iceland is very dependent on imports and the exchange rate
has a large influence on prices of consumer goods. The 12-month
inflation rate now measures at 14.5 percent. Many Icelanders are
also feeling the pinch as their monthly payments on foreign currency
loans -- a common instrument for car loans and mortgages -- have
risen dramatically.


3. (U) Calls for adopting the Euro have increased as the ISK has
slipped. Prominent members of the Progressive Party, an opposition
party in Parliament, are proposing a referendum in early 2009 on
joining the EU. However, Prime Minister Geir Haarde continues to
take what he calls a pragmatic approach to the currency issue and he
believes the benefits of keeping the ISK outweigh those of adopting
the Euro at this time.

KLOPFENSTEIN